THE MICROSOFT INVESTOR: Wall Street Says Back Up The Truck!

MSFT up big this morning on analyst upgrades and positive China news. The MSFT shares are up about 5% to about $26.30 this morning on a couple analyst upgrades and indications China will not dump the European debt it owns. The stock has rallied over the past year with the Windows 7 release, but over the long haul, we think Microsoft is in a challenging spot, as the world moves away from PC-based computing toward cloud and mobile computing. The next major catalyst is Office 2010. MSFT currently trades at 13x 2010E P/E - inexpensive compared to historical trading multiples, but Microsoft's rapid growth days are likely behind it.

Wall Street Says Back Up The Truck On Microsoft (Morgan Stanley; FBR)MSFT shares have gotten hammered recently - down about 20% for the year through yesterday's close - but several analyst upgrades are pushing the shares up over $1 today. On Monday Citi upgraded the stock, UBS reiterated a Buy yesterday, and today Morgan Stanley and FBR are banging the drum. Most calls were on valuation, which is difficult to argue with in the short-term. Long-term we think Microsoft is in a challenging spot.

Morgan Stanley analyst Adam Holt says "while we understand some of the mechanics of the pullback, the "liquidity" factor, and the relative low cost to short, the stock may have overshot to the downside...Ests. for FY11 look reasonably conservative given the strong product cycle, which in turn should enable MSFT to absorb macro weakness better than most. We also believe MSFT is likely buying back stock at current levels."

FBR analyst Terry Heath upgrades the stock to "Outperform" because "Microsoft is in the midst of a massive product cycle across many of its divisions. Most importantly, we believe we are in the early stages of the corporate PC cycle refresh that should provide a boost to the company’s flagship desktop offerings (Windows 7 and Office 2010). We think the risk/reward profile is attractive given the underperformance of the shares."

Top Entertainment Execs Out At Microsoft (Business Insider)After a number of poor product launches (remember the Microsoft Zune and what happened to the Courier?) top entertainment executives J Allard and Robbie Bach are leaving Microsoft as part of a management reorganization. The exit went as smoothly as possible according to an email distributed by Allard. The XBox has held its own in a difficult gaming industry, but Microsoft's mobile and devices efforts just haven't worked out. We think even with new blood any turnaround in the division going to be very tough given momentum from competitors like Google and Apple.

What's With All Those Hotmail Ads? (Seattle PI)Reporter Nick Eaton is seeing Hotmail ads everywhere - on big-screen monitors in airports, big-city billboards, and other media. Hotmail has been an also-ran among email providers for years so why the big ad campaign now? Microsoft is likely realizing it needs to drive more email use in order to drive traffic to and engagement on its other ad properties. Of course, online is a tiny portion of Microsoft's overall revenue (about 4%) and it has long bled cash from the company's other profitable business lines (like Windows). A a result, we continue to think Microsoft should either get out of the online business or make a big acquisition that will turn it into a serious player in the space.

Has Microsoft Under Steve Ballmer Experienced A Lost Decade? (Fortune)Apple's market cap is now bigger than Microsoft's - a rapid turn of events over just ten years. "The turnaround -- one of the most remarkable in U.S. corporate history -- dates from January 2000, when Microsoft's market cap began a 10-year decline and Apple's started to catch up. It also happens the mark the date when Bill Gates stepped down as Microsoft CEO and named Steve Ballmer to replace him." Here is Ballmer's response according to the AP: "My focus is on ... what we should be doing to our product line, where do we go, how do we make products more innovative." That's exactly what he should be doing. Unfortunately the company's track record in innovation the past ten years has not been so hot.